The upcoming release of September’s existing-home sales data is anticipated to reveal a significant drop in sales, reaching the lowest level in over ten years. This decline can be attributed to the rise in mortgage rates, further exacerbating the situation for the housing market.
In recent weeks, the increasing rates have had a detrimental impact on housing market sentiment and mortgage applications. According to Freddie Mac’s weekly gauge, mortgage rates quickly surpassed 2022’s high of 7.08% in mid-August and continued to climb. Last week, the average mortgage rate rose to 7.57%—the highest it has been since late 2000.
Due to the rapid increase in rates, home sales in August plummeted to their lowest level since January, as reported by the National Association of Realtors last month. It’s important to note that the figure for August primarily represents properties that went under contract earlier in the summer, meaning the complete consequences of the mortgage rates surpassing 7% and their subsequent rise into mid-October are yet to be fully reflected in the monthly report.
The release of September’s report on Thursday is expected to bring about a change. Economists polled by FactSet predict a 3.5% decline in existing-home sales—the lowest level since October 2010. If these expectations are met, it will mark the most significant month-over-month decline since November 2022 when rising rates had a similar impact on buying activity.
Recent data has already indicated how higher rates are affecting homebuyers. Fannie Mae’s September housing market sentiment survey reveals that only 16% of respondents believe it is currently a good time to buy a house—a historically low figure. This sentiment matches the levels seen in October and November 2022, making it the lowest share since the question was first asked in 2010.
Unsurprisingly, the decrease in homebuying sentiment has translated into a reduced number of mortgage applications—a reliable leading indicator for future home sales. The Mortgage Bankers Association’s weekly release of home loan application volume has consistently remained at multidecade lows as fixed mortgage rates continue to rise.
The housing market has been a disappointment not just for buyers, but for builders as well. According to data from the National Association of Home Builders, industry sentiment turned pessimistic in September after several months of neutral or optimistic readings. Experts predict that the October result, set to be released on Tuesday, will also reflect this pessimistic outlook.
Investors in home builders have experienced a turbulent ride in recent weeks, thanks to the rise in Treasury yields and mortgage rates. Two exchange-traded funds that track the home builders and related industries, namely the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), have seen drops of approximately 12% and 14% respectively over the past six weeks, as reported by Dow Jones Market Data. Despite these declines, the ETFs have still delivered a solid return of around 25% year to date, having experienced notable success earlier this year due to increasing demand for new homes amidst a limited supply of previously owned homes on the market.
While builder shares have recently underperformed, the impact of rising mortgage rates on buyer demand is not a novel occurrence. JPMorgan analyst Michael Rehaut projects further growth in the industry by 2024, as he believes that larger-cap builders’ earnings per share will experience double-digit growth despite challenges such as increasing interest rates and anticipated economic slowdown. In a recent note titled “Looking to 2024, Deja Vu from 2H22?”, Rehaut opined that although today’s interest rate movement is not as disruptive compared to previous instances, there are similarities to what was experienced in the latter half of 2022 where builders faced investor concerns followed by a rebound in both fundamentals and stock performance in 2023. Rehaut reiterated his Overweight ratings for PulteGroup (PHM), Toll Brothers (TOL), Meritage Homes (MTH), and Taylor Morrison Home (TMHC).
In summary, the housing market has taken a downturn that has affected both buyers and builders alike. Despite recent challenges, experts foresee potential growth and resilience in the industry in the coming years. It remains to be seen if the market will rebound and provide a more optimistic outlook for all stakeholders involved.
